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Time series methods for identifying structural economic disturbances often require disturbances to satisfy technical conditions that can be inconsistent with economic theory. We propose replacing these conditions with a less restrictive condition called recoverability, which only requires that the disturbances can be inferred from the observable variables. As an application, we show how shifting attention to recoverability makes it possible to construct new identifying restrictions for technological and expectational disturbances. In a vector autoregressive example using post-war U.S. data, these restrictions imply that independent disturbances to expectations about future technology are a major driver of business cycles.

The literature on belief-driven business cycles treats news and noise as distinct representations of agents’ beliefs. We prove they are empirically the same. Our result lets us isolate the importance of purely belief-driven fluctuations. Using three prominent estimated models, we show that existing research understates the importance of pure beliefs. We also explain how differences in both economic environment and information structure affect the estimated importance of pure beliefs.

We formalize the idea that house price changes may drive rational waves of optimism and pessimism in the economy. In our model, a house price increase caused by aggregate disturbances may be misinterpreted as a sign of higher local permanent income, leading households to demand more consumption and housing. Higher demand reinforces the initial price increase in an amplification loop that drives comovement in output, labour, residential investment, land prices, and house prices even in response to aggregate supply shocks. The qualitative implications of our otherwise frictionless model are consistent with observed business cycles and it can explain the economic impact of apparently autonomous changes in sentiment without resorting to non-fundamental shocks or nominal rigidity.

We identify the main shock driving fluctuations in long-horizon productivity expectations, consistent with theories of TFP news. The identified shock induces strong comovement patterns in output, consumption, investment, employment, and stock prices even though TFP does not change significantly for more than 2 years. A labor search model in which wages are determined by a cash-flow sharing rule, rather than the present value of match surplus, matches the observed responses to the news shock. The model also matches the empirical patterns of vacancies, labor force participation, hours, and job-finding rates. The proposed wage rule is consistent with empirical responses of wages to both anticipated and unanticipated productivity changes.

This paper uses a quantitative theory to explore whether escalating geoeconomic conflict and protectionism could threaten the dominant role of the US dollar in the international monetary system. The theory emphasizes the joint determination of countries’ portfolio choices and the currency used for financing international trade, and introduces the Chinese yuan as a potential competitor to the dollar. We find that even a substantial increase in trade tariffs and protectionism would not change the dollar’s dominant role. However, policies directly supporting the yuan’s international use could end the dollar’s dominance if implemented for more than a decade. US economic sanctions on a substantial portion of dollar assets held abroad also pose a threat, but only if maintained for more than 15 years. If competing trading blocs substantively eliminated trade across blocs, a regime with bloc-specific dominant currencies becomes likely.

This paper models the tradeoff, perceived by central banks and other public actors, between providing the public with useful information and the risk of overwhelming it with excessive communication. An information authority chooses how many signals to provide regarding an aggregate state and agents respond by choosing how many signals to observe. When agents desire coordination, the number of signals they acquire may decrease in the number released. The optimal quantity of communication is positive but does not maximize agents' acquisition of information. In contrast to a model without information choice, the authority always prefers to provide more precise signals.

We provide predictions for DSGE models with incomplete information that are robust across information structures. Our approach maps an incomplete-information model into a full-information economy with time-varying expectation wedges and provides conditions that ensure the wedges are rationalizable by some information structure. Using our approach, we quantify the potential importance of information as a source of business cycle fluctuations in an otherwise frictionless model. Our approach uncovers a central role for firm-specific demand shocks in supporting aggregate confidence fluctuations. Only if firms face unobserved local demand shocks can confidence fluctuations account for a significant portion of the US business cycle.

We formalize the editorial role of news media in a multisector economy and show that media can be an independent source of business cycle fluctuations, even when they report accurate information. Public reporting about a subset of sectoral developments that are newsworthy but unrepresentative causes firms across all sectors to hire too much or too little labor. We construct historical measures of US sectoral news coverage and use them to calibrate our model. Time-varying media focus generates demand-like fluctuations that are orthogonal to productivity, even in the absence of non-TFP shocks. Presented with historical sectoral productivity, the model reproduces the 2009 Great Recession.

We present a model in which some goods trade in \"customer markets\" and advertising facilitates long-lived relationships. We estimate the model on U.S. data and find a large congestion externality in the pricing of customer market goods. This motivates the analysis of optimal policy. Under a complete set of taxes, fiscal policy eliminates the externalities with large adjustments in tax rates on customer markets goods, while labor tax volatility remains low. Constraining the instruments to the interest rate and labor tax, the optimal labor tax displays large and procyclical fluctuations, but monetary policy is little changed compared to a model with no customer markets.

Working Paper No. 16169 The SVAR and narrative approaches to estimating tax multipliers deliver significantly different results. The former yields multipliers of about 1 percent, whereas the latter produces much larger multipliers of about 3 percent. The SVAR and narrative approaches differ along two important dimensions: the identification scheme and the reduced-form transmission mechanism. This paper uses a DSGE-model approach to evaluate the hypothesis that the different tax multipliers stemming from the SVAR and narrative approaches are due to differences in the assumed reduced-form transmission mechanisms. The main finding of the paper is that in the context of the DSGE model employed this hypothesis is rejected. Instead, the observed differences in estimated multipliers are due either to both models failing to identify the same tax shock, or to small-sample uncertainty.